6/11/2010 @ 6:00AM

Euro Bargains

To many American tourists France is the center of the universe, but to U.S. investors it’s more like Mars. It’s an alien, inhospitable place where costs are high, labor laws rigid and economic growth paltry. To top it off, the land of Bordeaux and brie hasn’t exactly gone out of its way to make it easy for Yanks to own a few shares. Only seven French companies trade on the NYSE (compared with about two dozen British firms).

That’s too bad, say Isabel Levy and François-Marie Wojcik. Over the past eight years they have built Metropole Gestion, situated steps from the Paris Bourse, into a firm managing $2.5 billion, mostly in Sicavs (French mutual funds).

Dabbling in a broad swath of European stocks, Metropole’s value yardsticks differ by industry. For banks Levy and Wojcik typically get interested when the price of a share is close to or below its book value. In pharmaceuticals they’ll pay up to 2 times annual sales but sell at 3 times. With retailers like Carrefour they like to buy at 0.3 times sales and sell at a multiple of 0.7 (
Wal-Mart
goes for 0.5 times). Often such practices put Metropole France, their all-French fund, far away from the action of the moment.

“We are the grandchildren of the 18th-century philosophers Voltaire and Diderot,” says Wojcik, seated in Metropole Gestion’s offices inside an ornate Belle Epoque building that once housed a Paris bank. “We doubt everything. Doubt, doubt, doubt.” As an example, he says if a chief executive boasts of his plans to become his industry’s leader, “We don’t say, ‘Merveilleux!’ “

Levy, 48, and Wojcik, 50, are a rather odd pair of business partners. A friend of both introduced the two in 1997 when tech was booming. They discovered a shared skepticism about the prospects for then high-flying telecom and set up Metropole Gestion in 2002. (Their funds are unavailable in the U.S., but for a list of French companies and a fund that do trade in the U.S., see the table above.)

Levy, who oversees the company’s portfolio managers, is hyperkinetic. Wojcik, the chief executive officer, is a portly and slow-talking Frenchman of Polish descent. They are one, however, in the view that there’s often a disconnect between the way the market values companies and their intrinsic value, which can be defined as what a rational corporate acquirer would be willing to pay.

Since buying something cheap isn’t profitable if it stays that way, Levy and Wojcik look for a catalyst that will lead to an upward reappraisal over the following 18 months. That might be an acquisition or other event, or the higher profit margin they believe will result from a merger. To U.S. investors talk of “catalysts” is clichéd; in France it’s still somewhat novel.

How’s the shopping these days? Excellent, says Levy, given the tumble European stocks have taken at the hands of Greek deadbeats. “You can buy companies with very good pricing power at a discount,” she says. For U.S. buyers of European stocks, there is the additional bargain element of the euro’s fall to a four-year low versus the dollar.

Levy likes Schneider Electric, a Rueil-Malmaison maker of gear like circuit breakers. Metropole France first invested in January 2009 when Schneider was trading at $51.24, or 0.9 times sales, versus a long-term average of 1.6. The fund dumped Schneider this March when it hit 1.4 times sales and $106 (at current exchange rates), then bought it back in May at 1.2 times sales.

Most of Metropole France’s investments are more long term, and it holds up to 10% of its assets in a single stock. Over the past five years the fund has returned 6% annually, net of fees, versus –0.49% for the CAC-40.

Its holdings include some companies not generally regarded as value plays, like ad agency Publicis and luxe-brand purveyor LVMH Moët Hennessy Louis Vuitton. Metropole first bought into LVMH seven years ago, after it had acquired distributor DFS, fallen out of favor with investors and was trading for a 34% discount to Metropole’s estimate of its breakup value.

“We don’t believe there are value stocks and growth stocks,” explains Levy. “Every company at some point can be undervalued or overvalued.”

Metropole France watched Publicis for four years before its price fell to 1.2 times revenue, and the fund began buying at $34. It has taken a similar approach to banks.

Many investors shun BNP Paribas for what by European standards is a large retail banking operation relative to its investment banking business. Levy, by contrast, was attracted to the commercial side’s stability and began buying shares at one times book, or $49, in November 2008.

BNP Paribas looks likely to fare better than many rivals in the current environment, thanks to the stability of its branch network. It should also enjoy a boost from its recent purchase of Fortis, a banking, insurance and money management outfit, Levy adds.

Levy and Wojcik are willing to venture even into industries whose fundamentals they loathe–if the price is right. That’s what they did with Air France in March 2009, when they bought in at 1.2 times operating cash flow (in the sense of cash flow from operations minus costs associated with long-term investments and capital spending), or $9 a share at the present exchange rate. Recent price: $12.

Some companies they wouldn’t buy at any price.
BP
fits that category, with its open-ended liabilities from the Gulf of Mexico spill. Not to mention the fact that it’s British.

Euro Treasure?

The French fund and stocks below are among the few available in the U.S. They may be worth a look amid the recent tumble in European stock prices and the euro.

.

Price

.

.

Company/Fund

Recent

52-week

High

Market

Value

($Bil)

2010

Estimated

PE

iShares MSCI France Index ETF

$20.21

$27.32

NA

NA

BNP Paribas

28.24

43.55

$66.9

8

Sanofi-Aventis

29.76

41.59

78.0

7

Schneider Electric

10.16

12.00

27.1

16

Societe Generale

8.40

16.40

31.1

8

All figures are in U.S. dollars. Prices as of June 1. All companies trade in the U.S. as ADRs. NA: Not available.
Sources: Bloomberg; Interactive Data and Thomson Reuters IBES via FactSet Research Systems.